xQUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

For the
quarterly period ended June 30, 2009

OR

oTRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

Commission
File Number 001-32563

Orchids
Paper Products Company

(Exact name of
Registrant as Specified in its Charter)

Delaware

23-2956944

(State or Other
Jurisdiction of

(I.R.S. Employer

Incorporation or
Organization)

Identification
No.)

4826 Hunt
Street

Pryor,
Oklahoma 74361

(Address of
Principal Executive Offices and Zip Code)

(918)
825-0616

(Registrants
Telephone Number, Including Area Code)

Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirement for the
past 90 days. Yes x No o

Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):

Large
accelerated filer o

Accelerated
filer o

Non-accelerated
filer o

Smaller
reporting company x

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x

Number of shares
outstanding of the issuers Common Stock, par value $.001 per share, as of August 12,
2009: 6,518,272 shares.

Orchids Paper Products
Company (Orchids or the Company) was formed in 1998 to acquire and operate
the paper manufacturing facility, built in 1976, in Pryor, Oklahoma. Orchids Acquisition Group, Inc. (Orchids
Acquisition) was established in November 2003, for the purpose of
acquiring the common stock of Orchids.
Orchids Acquisition closed the sale of its equity and debt securities on
March 1, 2004, and immediately thereafter closed the acquisition of
Orchids. In April 2005, Orchids
Acquisition merged with and into Orchids, with Orchids as the surviving entity.

On July 20, 2005,
the Company completed its public offering of 3,234,375 shares of its common
stock. The public offering price of the
shares was $5.33. The net proceeds from
the offering were $15,011,000 after deducting the underwriting discount and
offering expenses. The Companys stock
trades on the NYSE Amex under the ticker symbol TIS.

The accompanying
financial statements have been prepared without an audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the Commission). Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to the rules and regulations. However, the Company believes that the
disclosures made are adequate to make the information presented not misleading
when read in conjunction with the audited financial statements and the notes
thereto. Management believes that the
financial statements contain all adjustments necessary for a fair statement of
the results for the interim periods presented.
All adjustments were of a normal, recurring nature. The results of operations for the interim
period are not necessarily indicative of the results for the entire fiscal
year.

Note 2Fair Value Measurements

The Company has
previously adopted Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157), for assets and liabilities which are required to be
measured at fair value. SFAS 157 establishes a framework for measuring fair
value and related disclosures. SFAS 157 has the following key elements:

·Defines fair value as the exit price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date;

·Requires consideration of the Companys
creditworthiness when valuing liabilities; and

·Expands disclosures about instruments measured at fair
value.

The valuation hierarchy
considers the transparency of inputs used to value assets and liabilities as of
the measurement date. The less transparent or observable the inputs used to
value assets and liabilities, the lower the classification of the assets and
liabilities in the valuation hierarchy. A financial instruments classification
within the valuation hierarchy is based on the lowest level of input that is
significant to its fair value measurement. The three levels of the valuation
hierarchy and the classification of the Companys financial assets and
liabilities within the hierarchy are as follows:

Level 1 - Quoted prices
(unadjusted) in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date.

Level 2 - Observable
inputs other than quoted prices included within Level 1 for the asset or
liability, either directly or indirectly. If an asset or liability has a specified term,
a Level 2 input must be observable for substantially the full term of the asset
or liability.

Level 3 - Unobservable
inputs for the asset or liability.

The Company considers the
following to be financial instruments:
cash, short term investments, accounts receivable, accounts payable and
debt. The estimated fair value of such instruments
at June 30, 2009 approximates their carrying value as reported on the
Companys balance sheet.

The following
table presents information about Orchids Paper Products Companys assets
measured at fair value on a recurring basis as of June 30, 2009, and
indicates the fair value hierarchy of the valuation techniques utilized to
determine such values. Short term investments are valued as Level 1 in
the fair value hierarchy from independent pricing services utilized by our
investment custodians. Short term debt and long term debt are valued as
Level 2 in the fair value hierarchy as these assets are not traded on the open
market. The fair value of the Companys
debt is based on current rates offered to the Company for similar debt of the
same remaining maturities and additionally, the Company considers its
creditworthiness in determining the fair value of its debt.

Fair Value Measurements at June 30, 2009

Using Inputs Considered as

Level 1

Level 2

Level 3

Assets

Short
term investments

$

2,500

$



$



Liabilities

Short
term debt

$



$

3,363

$



Long
term debt



19,268



$



$

22,631

$



Note 3 
Commitments and Contingencies

The Company is involved
from time to time in litigation arising from the normal course of business. In
managements opinion, the result from such litigation is not expected to
materially affect the Companys results of operations or financial condition.

On August 1, 2007,
the Company received a new water discharge permit that requires the Company to
reduce its biological oxygen demand and total suspended solids from its
discharge water, thereby resulting in the need to expand its pre-treatment
facility. Under the permit, the Company
was required to meet the stricter limitations by August 1, 2009. Construction of the $4.3 million project was
completed in mid-July and as of August 1, 2009 our water discharge
met the requirements of the new water discharge permit. The Company has approximately $1.0 million of
committed capital expenditures at June 30, 2009 in conjunction with this
project that have not yet been paid.

In
the fourth quarter of 2008, the Company entered into a contract to purchase
334,000 MMBTU natural gas requirements at $7.50 per MMBTU plus a $0.07 per
MMBTU management delivery fee for the period from April 2009 through March 2011. The amount represents approximately 60% of
the Companys natural gas requirements based upon expected usage rates for
2009. If the Company is unable to
purchase the contracted amounts and the market price at that time is less than
the contracted price, the Company would be obligated under the terms of the
agreement to reimburse an amount equal to the volume purchased that was less
than the contracted amount multiplied by the difference between the contract
price and current spot price. This fixed price natural gas contract meets the qualifications
of the normal purchases and normal sales exception for SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities.

We are in negotiations to
purchase approximately 20 acres of land next to our existing Oklahoma facility
for the construction of a new warehouse.

The computation of basic and
diluted net income per share for the three-month and six-month periods ended June 30,
2009 and 2008 is as follows:

Three
Months Ended June 30,

Six
Months Ended June 30,

2009

2008

2009

2008

Net income - ($ thousands)

$

3,775

$

887

$

6,572

$

1,498

Weighted average shares outstanding

6,468,529

6,328,986

6,421,441

6,328,017

Effect of stock options

316,365

81,839

265,676

91,154

Effect of dilutive warrants

106,314

115,805

91,801

121,895

Weighted average shares outstanding - assuming
dilution

6,891,208

6,526,630

6,778,918

6,541,066

Net income (loss) per share:

Basic

$

0.58

$

0.14

$

1.02

$

0.24

Diluted

$

0.55

$

0.14

$

0.97

$

0.23

Stock options not considered above because they
were anti-dilutive

33,750

57,500

49,750

33,750

Note 6  Stock Incentive Plan

In April 2005, the
board of directors and the stockholders approved the 2005 Stock Incentive Plan
(the Plan). The Plan provides for the
granting of incentive stock options to employees selected by the boards
compensation committee. The Plan
authorized up to 697,500 shares to be issued.
In May 2008, the shareholders approved increasing the number of
authorized shares under the Plan from 697,500 to 897,500. Generally, the options vest 20% on the date
of grant and then ratably 20% over the following four years and have a ten-year
term. Options for 20,000 shares were
granted effective January 20, 2009, to Keith Schroeder, the Companys
Chief Financial Officer, at an exercise price of $10.205, the fair market value
of the stock on the date of grant. Mr. Schroeders
options vest 50% on the 1st anniversary date of the grant and 50% on the 2nd
anniversary date. The options have a 10
year life.

The following table
details the options granted to certain members of the board of directors and
management during the six months ended June 30, 2008 and 2009.

Grant

Number

Exercise

Risk-Free

Estimated

Dividend

Expected

Date

of Shares

Price

Interest Rate

Volatility

Yield

Life

May-08

28,750

$

7.48

3.78

%

41

%

None

5 years

Jun-08

20,000

$

7.80

3.98

%

40

%

None

5 years

January-09

60,000

$

10.21

2.35

%

46

%

None

5-7 years

May-09

49,750

$

17.48

3.30

%

50

%

None

5-7 years

The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In addition, options valuation models require
the input of highly subjective assumptions including the expected stock price
volatility.

In connection with the
approval of the Plan, the Company adopted SFAS No. 123 (R) Share-Based
Payments and expenses the cost of options granted over the vesting period of
the option based on the grant-date fair value of the award. The Company recognized an expense of $353,000
and $154,000 for the three months ended June 30, 2009 and 2008,
respectively, related to options granted under the Plan. The Company recognized an expense of $435,000
and $205,000 for the six months ended June 30, 2009 and 2008,
respectively, related to options granted under the Plan.

The Company sells
primarily all of its paper production in the form of converted products;
however, following the start-up of a new paper machine in the summer of 2006,
the Company had excess paper production which it began to sell in parent roll
form. Revenues from converted product
sales and parent roll sales in the three-month and six-month periods ended June 30,
2009 and 2008 were:

Three
Months Ended June 30,

Six
Months Ended June 30,

2009

2008

2009

2008

Converted
product net sales

$

22,533

$

17,380

$

43,591

$

34,498

Parent
roll net sales

1,598

4,935

4,180

8,092

Total
net sales

$

24,131

$

22,315

$

47,771

$

42,590

Credit risk for the
Company is concentrated in three significant customers. These are customers of the Companys
converted product, each of whom operates discount retail stores located
throughout the United States. During the
three months ended June 30, 2009, sales to the three significant customers
accounted for approximately 58% of total sales, comprised of customers of 31%,
15%, and 12%, respectively. For the
three months ended June 30, 2008, these three customers and one customer
who accounts for most of the Companys third-party sales of parent rolls
accounted for approximately 69% of total sales, comprised of customers of 22%,
18%, 16% and 13%, respectively. For the
six months ended June 30, 2009, sales to the three significant converted
product customers accounted for approximately 56% of total sales, comprised of
customers of 28%, 15%, and 13%, respectively. For the six months ended June 30,
2008, these three converted product customers plus the one customer of the
Companys third-party sales of parent rolls accounted for approximately 67% of
total sales, comprised of customers of 23%, 17%, 14% and 13%, respectively. At June 30,
2009 and 2008, respectively, approximately $4.1 million (57%) of accounts
receivable was due from the three significant customers and $5.2 million (74%)
of accounts receivable was due from the four significant customers. No other customer of the Company accounted
for more than 10% of sales during these periods. The Company generally does not require
collateral from its customers and has not incurred any significant losses on
uncollectible accounts receivable.

Note 8  New Accounting Standards

The Financial Accounting
Standards Board (FASB) periodically issues new accounting standards in a
continuing effort to improve standards of financial accounting and reporting.
We have reviewed the recently issued pronouncements and concluded that the
following new accounting standards could be applicable to the Company:

In April 2009, the
FASB issued FSP No. 107-1 Interim Disclosures about Fair Value of
Financial Instruments. This FSP
increases the frequency of fair value disclosures to a quarterly instead of an
annual basis. This FSP is effective for
interim and annual periods ending after June 15, 2009. Orchids adopted this standard and applicable
disclosures are reflected in Note 2.

In May 2009, the
FASB issued SFAS No. 165 Subsequent Events. This statement requires entities to disclose
the date through which they have evaluated subsequent events and whether the
date corresponds with the release of their financial statements. This standard is effective for interim and
annual periods ending after June 15, 2009.
Orchids adopted this standard and the date has been added to Note 9 to
these financial statements.

In June 2009, the
FASB issued SFAS No. 167, which amends FASB Interpretation No. 46(R) Consolidation
of Variable Interest Entities. This
statement amends FIN 46 (R) by altering how a company determines when an
entity that is insufficiently capitalized or not controlled through voting
should be consolidated. This standard is
effective at the start of the first fiscal year beginning after November 15,
2009. At this time, Orchids has no
variable interest entities as defined by the standard.

In June 2009, the
FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles. This codification represents a single source
of authoritative nongovernmental U.S. generally accepted accounting principles
(GAAP). This Codification is effective
for interim and annual periods after September 15, 2009. Orchids will adopt this standard effective
with the third quarter Form 10-Q filing.

On July 31, 2009 the
Company amended its credit facility with Bank of Oklahoma and Commerce
Bank. The amended facility was changed
as follows:

·Establishment of a construction loan that
provides for periodic loan advances with a maximum principal amount of $6.7
million to finance a warehouse expansion project, which includes the purchase
of land and the construction of a new 270,000 square foot warehouse. The construction loan will convert to a term
loan in August 2010 and will mature in July 2016. The loan will be based on an eighty percent
(80%) advance rate of the costs of construction of the project;

·The term of the existing revolving credit
facility is extended to April 9, 2011;

·any of our other plans, objectives, and intentions
contained in this report that are not historical facts.

These statements relate
to future events or future financial performance, and involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed
or implied by such forward-looking statements.
In some cases, you can identify forward-looking statements by terminology
such as may, should, could, expects, plans, intends, anticipates,
believes, estimates, predicts, potential or continue or the negative
of such terms or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. These statements are only predictions.

You should not place
undue reliance on forward-looking statements because they involve known and
unknown risks, uncertainties, and other factors that are, in some cases, beyond
our control and that could materially affect actual results, levels of
activity, performance or achievements.
Factors that could materially affect our actual results, levels of
activity, performance or achievements include, without limitation, those
detailed under the caption Risk Factors in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008, as filed with the Securities
and Exchange Commission, and the following items:

·intense competition in our market and
aggressive pricing by our competitors could force us to decrease our prices and
reduce our profitability;

·a substantial percentage of our converted
product revenues are attributable to three large customers which may decrease
or cease purchases at any time;

·significant indebtedness limits our free
cash flow and subjects us to restrictive covenants relating to the operation of
our business;

·the availability of and prices for
energy;

·failure to purchase the contracted
quantity of natural gas may result in financial exposure;

·our exposure to variable interest rates;

·disruption in our supply or increase in
the cost of waste paper;

·the loss of key personnel;

·labor interruptions;

·natural disaster or other disruption to
our facility;

·ability to finance the capital
requirements of our business;

·cost to comply with existing and new laws
and regulations;

·failure to maintain an effective system
of internal controls necessary to accurately report our financial results and
prevent fraud;

·the parent roll market is a commodity
market and subject to fluctuations in demand and pricing;

·excess supply in the market may reduce
our prices;

·an inability to continue to implement our
business strategies;

·inability to sell the capacity generated
from our new converting line;

·failure to complete our project to add a
new converting line successfully or timely; and

·a significant decline in sales causing us
to no longer need the new converting line.

If any of these risks or
uncertainties materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in the
following Managements Discussion and Analysis of Financial Condition and
Results of Operations reflects our current views with respect to future events
and is subject to these and other risks, uncertainties, and assumptions
relating to our operations, results of operations, growth strategy, and liquidity. We

assume no obligation to
publicly update or revise these forward-looking statements for any reason,
whether as a result of new information, future events, or otherwise.

Overview

We manufacture bulk
tissue paper, known as parent rolls, and convert parent rolls into a full line
of tissue products, including paper towels, bathroom tissue and paper napkins
for the private label segment of the consumer, or at home, market. We have focused our product design and
manufacturing on the discount retail market, primarily the dollar store
retailers, due to their consistent order patterns, limited number of stock
keeping units, or SKUs, offered and the growth being experienced in this
channel of the retail market. While we
have customers located throughout the United States, we distribute most of our
products within approximately 900 miles of our northeast Oklahoma facility,
which we consider to be our cost-effective shipping area. However, we focus our sales efforts on an
area within an approximate 500-mile radius of our northeast Oklahoma facility. Our products are sold primarily under our
customers private labels and, to a lesser extent, under our brand names such
as Colortex®, Velvet®, My Size® and our environmentally friendly care®
line. All of our revenue is derived
pursuant to truck load purchase orders from our customers. We do not have supply contracts with any of
our customers. Revenue is recognized
when title passes to the customer.
Because our product is a daily consumable item, the order stream from
our customer base is fairly consistent with no significant seasonal
fluctuations. Changes in the national
economy do not materially affect demand for our converted products.

Our profitability depends
on several key factors, including:

· the
market price of our products;

· the
cost of recycled paper used in producing our products;

· the
efficiency of operations in both our paper mill and converting operations; and

· energy
costs.

The private label segment
of the tissue industry is highly competitive, and discount retail customers are
extremely price sensitive. As a result,
it is difficult to affect price increases.
We expect these competitive conditions to continue.

In June 2006, we
began operating a new paper machine with an annual capacity of approximately
33,000 tons. As a result, beginning in
the third quarter of 2006, we were able to eliminate the requirement to
purchase recycled parent rolls on the open market. In the second quarter of 2007, due to the
relatively high price of parent rolls, we began running all of our older
machines on a full-time basis. The
capacity of the new machine, in addition to the capacity of our older machines,
increased our total production capacity to approximately 56,000 tons per
year. We have been taking limited
downtime on some of our older machines in 2009 due to a soft parent roll
market, primarily due to a soft market in the away-from-home business, which is
where a majority of our parent roll sales occur. Our strategy is to sell all of our parent
roll capacity as converted products which generally carry higher margins than
parent rolls. We are focusing considerable efforts to improve our converting
efficiencies in order to achieve that goal.
Parent rolls are a commodity product and thus are subject to market
pricing. We plan to continue to sell any
excess parent roll capacity on the open market as long as market pricing is
profitable.

We currently utilize
warehouse space within our converting facility and rent additional space within
a third-party warehouse located in Tulsa, Oklahoma to store converted products
prior to shipping. We plan to purchase
approximately 20 acres of land next to our converting facility and construct a
270,000 square foot warehouse in which we will consolidate all of our converted
product storage. We plan to utilize the
freed space in our converting facility by purchasing and installing a new
converting line. The project cost for
the new converting line is expected to be $18.6 million and the project cost
for the new warehouse is expected to be $8.4 million. The new converting line project is expected
to add up to 4 million annual cases of incremental converted product capacity
and broaden our product offering through increased packaging configurations,
enhanced graphics and improved embossing.
We expect to begin construction of the new warehouse in August 2009
and to be fully operational by June 2010.
The new converting line is expected to be in start-up mode by June 2010
and reach full operating speeds by the end of the third quarter.

Our
strategy is to expand our position as a low cost provider of private label
tissue products to the growing discount retail channel within our geographic
area while leveraging our competitive advantages to increase our presence in
other retail channels. This will be accomplished through our continued high
service levels, increased total manufacturing capacity and expansion of our
high perceived value product offering.

With
our steady sales growth over the last eleven years, we have strategically
expanded capacity to meet demand. We are currently approaching full capacity
utilization of our converting operations. We plan to increase our converting
capacity by approximately four million cases annually with the installation of
a new converting line and construction of a warehouse. This additional capacity
will enable us to both increase sales of existing products and to provide the
flexibility to manufacture higher tier products for sales to our core customer
base and into new retail channels.

We
intend to implement this strategy through our key initiatives set forth below:

·

maintain
and strengthen our core customer relationships;

·

increase
our flexibility to meet a wider array of customer needs;

·

further
expand our customer base in other retail channels; and

·

continue to improve
operating efficiencies and to reduce manufacturing costs.

Net sales increased 8%,
to $24.1 million in the quarter ended June 30, 2009, compared to $22.3
million in the same period of 2008. Net
sales figures represent the gross selling price, including freight, less
discounts and pricing allowances. Net
sales of converted product increased in the quarter ended June 30, 2009 by
$5.1 million, or 30% to $22.5 million compared to $17.4 million in the same
period last year. Net sales of parent
rolls decreased $3.3 million or 68% to $1.6 million in the quarter ended June 30,
2009 compared to $4.9 million in the same period last year. The increase in net sales of converted
product is primarily the result of a 19% increase in the net selling price per
ton of converted product shipments and a 9% increase in tons of converted
product shipped. The increased tonnage
shipped is a result of the improved production in our converting plant, which
provided additional converted product for sale into the market. Net sales of parent rolls decreased primarily
as a result of a 58% decrease in parent roll tonnage shipped, as well as a 22%
decrease in the net selling price.

Total shipments in the
second quarter of 2009 decreased by 1,929 tons, or 13.6%, to 12,297 tons
compared to 14,226 tons in the same period of 2008. This decrease is the result of a 58% decline
in parent roll shipments for the second quarter of 2009, primarily due to the
continued softness in the away-from-home market for tissue products, which was
partially offset by a 9% increase in shipments of converted products. We continue to manage our parent roll
inventory by taking downtime on some of our older paper machines. Additionally, the improved converting production
cited above resulted in less parent roll tonnage available for sale into the
open market. Our overall net selling
price per ton increased by 25% in the second quarter of 2009 compared to the
prior year quarter due mainly to higher net selling prices for converted
products. The increase in net selling
price per ton of converted product was primarily the result of price increases
and product content changes achieved during 2008 and early 2009 to counteract
increased waste paper and energy prices.

Cost of Sales

Three
Months Ended June 30,

2009

2008

(in
thousands, except

gross
profit margin %

and
paper cost per ton)

Cost of paper

$

7,895

$

11,580

Non-paper materials, labor, supplies, etc.

7,574

6,841

Sub-total

15,469

18,421

Depreciation

834

772

Cost of sales

$

16,303

$

19,193

Gross Profit

$

7,828

$

3,122

Gross Profit Margin %

32.4

%

14.0

%

Total paper cost per ton consumed

$

642

$

814

The major components of
cost of sales are the cost of internally produced paper, raw materials, direct
labor and benefits, freight costs of products shipped to customers, insurance,
repairs and maintenance, energy, utilities and depreciation.

Cost of sales decreased
approximately $2.9 million, or 15%, to $16.3 million for the quarter ended June 30,

2009, compared to $19.2
million in the same period of 2008. This
decrease in our cost of sales was primarily attributable to lower paper
production costs, lower converting direct labor costs and converted product
packaging costs which were partially offset by higher converting overhead
costs. As a percentage of net sales,
cost of sales decreased to 68% in the 2009 quarter from 86% of net sales in the
2008 quarter. Cost of sales as a
percentage of net sales for the second quarter of 2009 was favorable to the
prior year quarter due to higher converted product net selling prices and lower
paper production costs.

Our overall cost of paper
in the second quarter of 2009 was $642 per ton, a decrease of $172 per ton
compared to the same period in 2008.
Paper production costs decreased primarily due to lower waste paper
prices and, to a lesser extent, lower natural gas prices. The prices we paid for waste paper in the
second quarter of 2009 decreased approximately 49% compared to the prices paid
in the prior year quarter. As a result,
our cost of waste paper consumed decreased approximately $2.6 million in 2009
compared to the second quarter of 2008.
Natural gas costs decreased approximately 30% or $380,000 in the second
quarter of 2009 compared to the same period in 2008, mainly driven by reduced
rates.

Converting direct labor
costs decreased in the 2009 quarter compared to the 2008 quarter by approximately
23% on a per unit basis due to both reduced headcount resulting from our
automation project completed in the first quarter of 2009 and higher
productivity. The lower labor costs
improved our gross profit margin by approximately $600,000. Due to favorable market conditions, we were
able to negotiate lower costs for our packaging materials. Converting overhead costs increased in the
2009 quarter over the 2008 quarter by approximately $880,000, primarily due to
an increase of $235,000 in cost of outside warehousing, a $191,000 increase in
overhead labor, $189,000 in relocation and recruitment costs and a $150,000
increase in our maintenance and repair costs.
The year over year increase in outside warehousing expense is due to
increased storage space requirements resulting from a higher level of converted
product production and shipments experienced in the second quarter of
2009. Overhead labor increased
primarily due to additions to our management team. The level of maintenance and repair costs
experienced in the second quarter of 2009 is expected to continue into the
future.

Gross Profit

Gross profit in the
quarter ended June 30, 2009, increased $4.7 million, or 151%, to $7.8
million compared to $3.1 million in the same period last year. Gross profit as a percentage of net sales in
the 2009 quarter was 32% compared to 14% in the 2008 quarter. The gross profit increase was the result of
lower waste paper prices, increased converted product net sales prices, an
increase in converted product tonnage shipped and lower converting direct labor
costs. As a result of the increased
converting production, more tonnage was consumed in our converting operation
rather than being sold as parent rolls, which positively affected our gross
profit because sales of converted products typically carry a higher margin than
sales of parent rolls.

Selling, General and
Administrative Expenses

Three
Months Ended June 30,

2009

2008

(In
thousands, except

SG&A
as a % of net sales)

Commission expense

$

346

$

251

Other S,G&A expenses

1,741

1,240

Selling, General & Adm exp

$

2,087

$

1,491

SG&A as a % of net sales

8.6

%

6.7

%

Selling, general and
administrative expenses include salaries, commissions to brokers and other
miscellaneous expenses. Selling, general
and administrative expenses increased $596,000, or 40%, to $2.1 million in the
quarter ended June 30, 2009 compared to $1.5 million in the comparable
2008 period. The increase was primarily
due to higher stock option expense, increased accruals under our incentive
bonus plan, increased commission expense related to our increased converted
product sales, and costs associated with additions to our senior management
team. Stock option expense increased
primarily due to the effect the year-over-year increase in the price of our
common stock had on the Black-Scholes calculation of the expense related to
stock options granted to our board of directors. As a percentage of net sales, selling,
general and administrative expenses increased to 8.6% in the second quarter of
2009 compared to 6.7% in the same period of 2008.

As a result of the
foregoing factors, operating income for the quarters ended June 30, 2009
increased $4.1 million from the same period in 2008.

Interest Expense and Other Income

Three
Months Ended June 30,

2009

2008

(In
thousands)

Interest
expense

$

135

$

320

Other
income

$

(1

)

$

(5

)

Interest expense includes
interest on all debt and amortization of deferred debt issuance costs. Interest expense decreased $185,000 to
$135,000 in the quarter ended June 30, 2009, compared to $320,000 in the
quarter ended June 30, 2008. Lower
LIBOR interest rates, lower margins over LIBOR, reflecting our improved
financial performance, and, to a lesser extent, the effect of lower borrowings,
were the primary reasons for the decrease in interest expense.

Income Before Income Taxes

As a result of the
foregoing factors, income before income taxes increased $4.3 million to $5.6
million in the quarter ended June 30, 2009, compared to $1.3 million in
the same period in 2008.

Income Tax Provision

As of June 30, 2009,
we estimate our full-year effective income tax rate to be 34.6%. Because the first quarter of 2009 was
recorded at a higher rate, our effective income tax rate for the quarter ended June 30,
2009 was 32.7%. Our rate is lower than
the statutory rate because of the Oklahoma Investment Tax Credits associated
with capital equipment investments and the utilization of Federal Indian Employment
credits. The Oklahoma Investment Tax
Credits offset our Oklahoma state tax liability. As of June 30, 2008, our annual
effective income tax rate was 33%.

We have extinguished our
Federal Net Operating Losses and, as a result have paid approximately $1.7
million in quarterly estimated tax payments in 2009. No current taxes are owed to state taxing
authorities because of the Oklahoma Investment Tax Credit carryforwards.

Comparative Six-Month Periods
Ended June 30, 2009 and 2008

Net Sales

Six
Months Ended June 30,

2009

2008

(in
thousands, except

price
per ton and tons)

Converted
product net sales

$

43,591

$

34,498

Parent
roll net sales

4,180

8,092

Total
net sales

$

47,771

$

42,590

Total
tons shipped

24,726

27,188

Average
price per ton

$

1,932

$

1,566

Net sales increased 12%
to $47.8 million in the six months ended June 30, 2009, compared to $42.6
million in the same period of 2008. Net
sales figures represent gross selling price, including freight, less discounts
and pricing allowances. Net sales of
converted product increased for the six months ended June 30, 2009, by
$9.1 million, or 26% to $43.6 million compared to $34.5 million in the same
period last year. Net sales of parent
rolls decreased $3.9 million or 48% to $4.2 million in the six months ended June 30,
2009 compared to $8.1 million in the same period last year. The overall increase in net sales is
primarily the result of a 22% increase in the net selling price per ton of
converted product shipments and a 16% increase in tons of converted product
shipped which was partially offset by a 41% decrease in parent roll

Total shipments in the
six-month period of 2009 decreased by 2,462 tons, or 9%, to 24,726 tons
compared to 27,188 tons in the same period of 2008, primarily due to a 41%
decrease in parent roll shipments. Our
overall net selling price per ton increased by 23% in the first six months of
2009 compared to the comparable prior year period. This increase was attributable to higher
prices for converted products, primarily due to product content reduction
actions taken during the last twelve months to counteract increased raw
material and energy costs.

Cost of Sales

Six
Months Ended June 30,

2009

2008

(in
thousands, except

gross
profit margin %

and
paper cost per ton)

Cost of paper

$

16,434

$

22,133

Non-paper materials, labor, supplies, etc.

15,439

13,120

Sub-total

31,873

35,253

Depreciation

1,638

1,526

Cost of sales

$

33,511

$

36,779

Gross Profit

$

14,260

$

5,811

Gross Profit Margin %

29.9

%

13.6

%

Total paper cost per ton consumed

$

664

$

809

The major components of
cost of sales are the cost of internally produced paper, raw materials, direct
labor and benefits, freight costs of products shipped to customers, insurance,
repairs and maintenance, energy, utilities and depreciation.

Cost of sales decreased
approximately $3.3 million, or 9%, to $33.5 million for the six months ended June 30,
2009, compared to $36.8 million in the same period of 2008. As a percentage of net sales, cost of sales
decreased to 70.1% of net sales in the six-month period ended June 30,
2009 from 86.4% of net sales in the six-month period ended June 30,
2008. The decrease in cost of sales as a
percentage of net sales in the six months ended June 30, 2009, was
primarily attributed to lower paper production costs, higher converted product
selling prices per ton, and lower converting direct labor costs which were
somewhat offset by higher converting overhead costs.

In the six months ended June 30,
2009, our overall cost of paper was $664 per ton, a decrease of $145 per ton
when compared to the same period in 2008.
Our cost per ton decreased primarily due to decreased waste paper prices
and, to a lesser extent, decreased prices of natural gas. Average waste paper prices have decreased
approximately 40%, which reduced our cost of waste paper consumed by $4.1
million in the first six months of 2009 compared to the same period of 2008. Natural gas prices decreased 27% in the 2009
period compared to the same period in 2008, resulting in decreased cost of
approximately $728,000.

Direct labor costs in the
first six months of 2009 were lower than the same period in 2008 by 25% on a
per unit basis for the same reasons cited for the three-month comparison. This had a favorable effect of approximately
$1.3 million on our gross profit margin.
Converting overhead expenses for the six months ended June 30,
2009, were higher than the same period of 2008, primarily due to increased
maintenance and repair costs of approximately $457,000, increased utilization
of outside warehousing resulting in increased costs of approximately $428,000,
and higher costs associated with additions to our management team of
approximately $294,000.

Gross Profit

Gross profit in the six
months ended June 30, 2009, increased $8.5 million, or 145 %, to $14.3
million compared to $5.8 million in the same period last year. Gross profit as a percentage of net sales in
the six-month period ended June 30, 2009, was 29.9% compared to 13.6% in
the same period in 2008. The effect of
lower paper production costs, particularly as a result of lower waste paper
prices as well as energy costs, higher converted product selling prices and
higher converted product shipments all contributed to the

Selling, general and
administrative expenses include salaries, commissions to brokers and other
miscellaneous expenses. Selling, general
and administrative expenses increased $1.0 million, or 36%, to $3.9 million in
the six months ended June 30, 2009, compared to $2.9 million in the
comparable 2008 period, mainly as a result of increased accruals under our
incentive bonus plan, costs associated with additions to our senior management
team, increased stock option expense, primarily due to an increase in the price
of our stock, increased sales commissions due to the increase in converted
product sales and increased professional and legal fees. As a percentage of net sales, selling,
general and administrative expenses increased to 8.2% in the six months ended June 30,
2009, compared to 6.8% in the same period of 2008.

Operating Income

As a result of the
foregoing factors, operating income for the six months ended June 30, 2009
was $10.3 million compared to operating income of $3.0 million for the same
period of 2008.

Interest Expense and Other Income

Six
Months Ended June 30,

2009

2008

(In
thousands)

Interest expense

$

294

$

731

Other income

$

(4

)

$

(6

)

Interest expense
decreased by $437,000 from $731,000 in the six months ended June 30, 2008,
to $294,000 in the same period in 2009.
The decrease was attributable to lower LIBOR rates, lower margins over
LIBOR attributable to our improved financial performance, and lower average
outstanding bank borrowings.

Income Before Income Taxes

As a result of the
foregoing factors, income before income taxes increased $7.9 million to $10.1
million in the six months ended June 30, 2009 compared to $2.2 million in
the same period in 2008.

Income Tax Provision

As of June 30, 2009,
we estimate our full-year effective income tax rate to be 34.6%. It is lower than the statutory rate because
of Oklahoma Investment Tax Credits associated with our investment in 2006 in a
paper machine as well as continued capital investment in our mill and
converting production facilities and the utilization of Federal Indian
Employment Credits. Our tax rate is
higher than 2008 as we have depleted all of our Federal net operating loss
carryforwards. For the six months ended June 30,
2008, our effective income tax rate was 32%.

Liquidity
refers to the liquid financial assets available to fund our business operations
and pay for near-term obligations. These
liquid financial assets consist of cash and short term investments as well as
unused borrowing capacity under our revolving credit facility. Our cash requirements have historically been
satisfied through a combination of cash flows from operations and debt
financings.

Cash increased in the six
months ended June 30, 2009, by $1.8 million. Additionally, we generated enough cash to
purchase $2.5 million in short term investments, consisting of institutional
money market funds. Cash increased by
$258,000 the six months ended June 30, 2008.

The following table
summarizes key cash flow information for the six-month periods ended June 30,
2009 and 2008:

Six
Months Ended June 30,

2009

2008

(in
thousands)

Cash flow provided by (used in):

Operating activities

$

9,997

$

3,706

Investing activities

$

(7,145

)

$

(2,736

)

Financing activities

$

(1,069

)

$

(712

)

Cash flow provided by
operating activities was $10.0 million in the six-month period ended June 30,
2009, which primarily resulted from earnings before non-cash charges and a net
increase in accounts payable and accrued liabilities partly offset by an
increase in trade receivables.

Cash flow used in
investing activities were $7.1 million in the first six months of 2009 as the
result of $4.6 million in expenditures on capital projects, primarily for the
waste water treatment project, as well as the purchase of $2.5 million in short
term investment securities.

Cash flows used in
financing activities was $1.1 million in the six-month period ended June 30,
2009, and was primarily attributable to $1.5 million of principal payments on
our term loans, $1.5 million repayment of our revolving line of credit which
was partially offset by $1.5 million of borrowings under our construction loan
for the waste water treatment project.

Cash flows provided by
operating activities was $3.7 million in the six-month period ended June 30,
2008, which primarily resulted from earnings before non-cash charges, higher
accounts payable and accrued expenses, partly offset by increased trade
receivables and inventories.

Cash flows used in
investing activities were $2.7 million in the six-month period ended June 30,
2008, as a result of expenditures on capital projects, primarily the previously
announced $4.75 million project to automate certain operations in our
converting plant.

Cash flows used in
financing activities was $712,000 in the six-month period ended June 30,
2008, and was primarily attributable to $1.0 million of principal payments on
our term loans, which were partially offset by $318,000 of borrowings under the
revolving credit agreement.

On July 31, 2009 the
Company amended its credit facility with Bank of Oklahoma and Commerce
Bank. The amendments to the facility are
noted below:

·Establishment of a construction loan that
provides for periodic loan advances with a maximum principal amount of $6.7
million to finance a warehouse expansion project, which includes the purchase
of land and the construction of a new 270,000 square foot warehouse. The construction loan will convert to a term
loan in August 2010 and will mature in July 2016. The loan will be based on an eighty percent
(80%) advance rate of the costs of construction of the project;

·The term of the existing revolving credit
facility is extended to April 9, 2011;

·Changes to LIBOR margin grid and the
inclusion of a 3.5% all-in interest rate floor and;

·A reduction of the Funded-Debt-To-EBITDA
covenant limit to 3.25 to one from 4.0 to one.

We currently utilize
warehouse space within our converting facility and rent additional space within
a third-party warehouse located in Tulsa, Oklahoma to store converted products
prior to shipping. We plan to purchase
approximately 20 acres of land next to our converting facility and construct a
270,000 square foot warehouse in which we will consolidate all of our converted
product storage. We plan to utilize the
freed space in our converting facility by purchasing and installing a new
converting line. The project cost for
the new converting line is expected to be $18.6 million and the project cost
for the new warehouse is expected to be $8.4 million. Funding for these projects is expected to
come from an equity offering in our common stock, borrowings under our credit
facility and funds from operations. The
new converting line project is expected to add up to 4 million annual cases of
incremental converted product capacity and broaden our product offering through
increased packaging configurations, enhanced graphics and improved
embossing. We expect to begin
construction of the new warehouse in August 2009 and to be fully
operational by June 2010. The new
converting line is expected to be in start-up mode by June 2010 and reach
full operating speeds by the end of the third quarter.

Critical Accounting Policies and
Estimates

The preparation of our
financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and judgments that affect our reported amounts of assets and
liabilities, revenue and expense, and related disclosures of contingent assets
and liabilities. On an ongoing basis, we
evaluate our estimates and assumptions based upon historical experience and
various other factors and circumstances.
Management believes that our estimates and assumptions are reasonable
under the circumstances; however, actual results may vary from these estimates
and assumptions under different future circumstances. We have identified the following critical
accounting policies that affect the more significant judgments and estimates
used in the preparation of our financial statements:

Accounts Receivable.
Accounts receivable consist of amounts due to us from normal business
activities. Our management must make
estimates of accounts receivable that will not be collected. We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the customers
creditworthiness as determined by our review of their current credit
information. We continuously monitor
collections and payments from our customers and maintain an allowance for
estimated losses based on historical experience and specific customer collection
issues that we have identified. Trade
receivables are written-off when all reasonable collection efforts have been
exhausted, including, but not limited to, external third party collection
efforts and litigation. While such
credit losses have historically been within managements expectations and the
allowance provided, there can be no assurance that we will continue to
experience the same credit loss rates as in the past. During the six-month periods ended June 30,
2009 and 2008, provisions for doubtful accounts were recognized in the amount
of $30,000 for each period. There were
no recoveries credited during the first six months of 2009. In the first six months of 2008, $3,000 of
recoveries of accounts previously written off were credited back to the
allowance. One accounts receivable
balance of $10,000 was written off in the six-month period ended June 30,
2009 and one accounts receivable balance of $3,000 was written off in the same
time period of 2008.

Inventory.
Our inventory consists of finished goods and raw materials and is stated
at the lower of cost or market. Our
management regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory based on the age of the inventory
and forecasts of product demand. A
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand.
During the first six months of 2009, $30,000 was provided and there were
charges totaling $192,000 against the valuation reserve. The charges against the reserve were
primarily the result of the product content changes made, or in the process of
being made, to our converted products and the resultant effect on certain raw
materials, primarily poly wrapping material, used in the converting process.
During the first six months of 2008, $55,000 was provided and there were
charges totaling $74,000 against the valuation reserve.

The Financial Accounting
Standards Board (FASB) periodically issues new accounting standards in a
continuing effort to improve standards of financial accounting and reporting.
We have reviewed the recently issued pronouncements and concluded that the
following new accounting standards could be applicable to the Company:

In April 2009, the
FASB issued FSP No. 107-1 Interim Disclosures about Fair Value of
Financial Instruments. This FSP
increases the frequency of fair value disclosures to a quarterly instead of
annual basis. This FSP is effective for
interim and annual periods ending after June 15, 2009. Orchids adopted this standard and applicable
disclosures are reflected in Note 2.

In May 2009, the
FASB issued SFAS No. 165 Subsequent Events. This statement requires entities to disclose
the date through which they have evaluated subsequent events and whether the
date corresponds with the release of their financial statements. This standard is effective for interim and
annual periods ending after June 15, 2009.
Orchids adopted this standard and the date has been added to Note 9 to
these financial statements.

In June 2009, the
FASB issued SFAS No. 167, which amends FASB Interpretation No. 46(R) Consolidation
of Variable Interest Entities. This
statement amends FIN 46(R) by altering how a company determines when an
entity that is insufficiently capitalized or not controlled through voting
should be consolidated. This standard is
effective at the start of the first fiscal year beginning after November 15,
2009. At this time, Orchids has no
variable interest entities as defined by the standard.

In June 2009, the
FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles. This codification represents a single source
of authoritative nongovernmental U.S. generally accepted accounting principles
(GAAP). This Codification is effective
for interim and annual periods after September 15, 2009. Orchids will adopt this standard with the
third quarter form 10-Q filing.

Non-GAAP Discussion

In
addition to our GAAP results, we also consider non-GAAP measures of our
performance for a number of purposes. We
use EBITDA as a supplemental measure of our performance that is not required
by, or presented in accordance with, GAAP.
EBITDA is not a measurement of our financial performance under GAAP and
should not be considered as an alternative to net income, operating income or
any other performance measure derived in accordance with GAAP, or as an
alternative to cash flow from operating activities or a measure of our
liquidity.

EBITDA represents net
income before net interest expense, income tax expense, depreciation and
amortization. We believe EBITDA
facilitates operating performance comparisons from period to period and company
to company by eliminating potential differences caused by variations in capital
structures (affecting relative interest expense), tax positions (such as the
impact on periods or companies of changes in effective tax rates or net
operating losses) and the age and book depreciation of facilities and equipment
(affecting relative depreciation expense).

EBITDA has limitations as
an analytical tool, and you should not consider it in isolation, or as a
substitute for any of our results as reported under GAAP. Some of these limitations are:

·it
does not reflect the interest expense, or the cash requirements necessary to
service interest or principal payments on our indebtedness;

·although
depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
EBITDA does not reflect cash requirements for such replacements; and

·other
companies, including other companies in our industry, may calculate these
measures differently than we do, limiting their usefulness as a comparative
measure.

Because of these
limitations, EBITDA should not be considered as a measure of discretionary cash
available to us to invest in the growth of our business or to reduce our
indebtedness. We compensate for these
limitations by relying primarily on our GAAP results and using EBITDA on a
supplemental basis.

The following table
reconciles EBITDA to net income for the three months ended June 30, 2009
and 2008:

Three
Months Ended June 30,

2009

2008

(In
thousands,

except
% of net sales)

Net
income

$

3,775

$

887

Plus:
Interest expense

135

320

Plus:
Income tax expense

1,832

429

Plus:
Depreciation

834

772

EBITDA

$

6,576

$

2,408

% of
net sales

27.3

%

10.8

%

EBITDA increased $4.2
million to $6.6 million for the quarter ended June 30, 2009, compared to
$2.4 million for the same period in 2008.
EBITDA as a percent of net sales increased to 27.3% in the second
quarter of 2009 from 10.8% in the second quarter of 2008. The foregoing factors discussed in the net
sales, cost of sales and selling, general and administrative expenses sections
are the reasons for the increase.

The following table
reconciles EBITDA to net income for the six months ended June 30, 2009 and
2008:

Six
Months Ended June 30,

2009

2008

(In
thousands,

except
% of net sales)

Net
income

$

6,572

$

1,498

Plus: Interest expense

294

731

Plus: Income tax expense

3,481

712

Plus: Depreciation

1,638

1,526

EBITDA

$

11,985

$

4,467

% of net sales

25.1

%

10.5

%

EBITDA
increased $7.5 million to $12.0 million for the six months ended June 30,
2009, compared to $4.5 million for the same period of 2008. EBITDA as a percent of net sales increased to
25.1% in the current six-month period from 10.5% in the prior year six-month
period. The foregoing factors discussed in
the net sales, cost of sales and selling, general and administrative sections
are the reasons for these changes.

ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk

There has been no material change in the information
provided in response to Item 7A of the Companys Form 10-K for the year
ended December 31, 2008.

ITEM 4. Controls and Procedures

Our
management, under the supervision and with the participation of our chief
executive officer and our chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended), as of
the end of the period covered by this Quarterly Report on Form 10-Q. Any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives. Based on
such evaluation, our chief executive officer and our chief financial officer
have concluded that our disclosure controls and procedures were effective as of
June 30, 2009.

There
were no changes in the Companys internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) during the quarter
ended June 30, 2009, that have materially affected,

or
are reasonably likely to materially affect, our internal control over financial
reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

Other
than as set forth below, as of the date of this filing, there have been no
material changes from the risk factors disclosed in the Companys Annual Report
on Form 10-K dated March 12, 2009.
We operate in a changing environment that involves numerous known and
unknown risks and uncertainties that could materially affect our operations.
The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K
and below may cause our actual results, performances and achievements to be
materially different from those expressed or implied by our forward-looking
statements. If any of these risks or events occur, our business, financial
condition or results of operations may be adversely affected.

We may not be able to sell the capacity
generated from our new converting line.

The
addition of the new converting line will substantially increase our converted
product production capacity and we may not be able to sell enough of our
products to fully utilize such capacity. We currently have excess parent
roll production capacity and our strategy includes converting and selling more
of our parent roll tonnage as converted product. Converted products sell
at a higher price per ton than parent rolls and typically carry a higher margin
on a tonnage basis. If we are unable to increase our sales of converted
product we will not be able to utilize the increased capacity from our new
converting line, resulting in lost opportunity for increased margins and the
need to temporarily or permanently curtail the production of one or more of our
existing converting lines.

We may experience problems with our new converting line which could
cause delayed or cancelled customer orders.

The
completion of the new converting line could be delayed or the converting line
may not provide the capacity, capability or efficiency which we have
projected. Our goal is to utilize the
increased capacity from our new line as rapidly as possible. To that end, we will begin our sales efforts
for the additional capacity prior to completion of the line. If the converting line completion is delayed
or if it has less capacity or efficiency, or the capabilities are not as
expected, customer orders could be delayed or canceled. Any such delays or cancellations could cause
significant harm to the relationships we have with new or existing customers,
and we may experience a material adverse
effect on our business.

If sales decline significantly we may determine that it is no longer
feasible to purchase a new converting line.

We
expect the new converting line will add capacity, efficiency and flexibility to
our current production capabilities. If
we experience a material decline in sales due to market, economic or other
conditions we may determine that it is no longer economically feasible to
purchase the new converting line.
Without the new converting line we may not have the flexibility to
expand in our target markets, or to execute on our strategy, including
increasing our flexibility to meet a wider array of customer needs, further
expanding in other retail channels, improving efficiencies and reducing
manufacturing costs.

ITEM 2. Unregistered Sales of Equity Securities and
Use of Proceeds

(a) Unregistered Sales of
Equity Securities

None.

(b) Initial Public Offering
and Use of Proceeds from the Sale of Registered Securities

We
do not have any programs to repurchase shares of our common stock and no such
repurchases were made during the three months ended June 30, 2009.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of Security
Holders

The
Annual Meeting of Stockholders of Orchids Paper Products Company was held on May 19,
2009. At the meeting, the following
matters were submitted to a vote of the stockholders:

(1)To elect seven directors for one-year terms expiring
at the conclusion of the Companys annual meeting in 2010. The vote with respect to each nominee was as
follows:

Nominee

For

Withheld

Gary P. Arnold

5,466,032

67,669

Steven R. Berlin

5,460,532

73,169

John C. Guttilla

5,466,032

67,669

Douglas E. Hailey

5,466,032

67,669

Jeffrey S. Schoen

5,456,207

77,494

Jay Shuster

5,392,813

140,888

Robert A. Snyder

5,463,782

69,919

(2)To ratify the appointment of HoganTaylor LLP as the Companys
independent registered public accounting firm for 2009:

For

Against

Abstain

5,508,250

17,367

8,083

All
of the directors listed above were elected and HoganTaylor LLP was ratified as
our independent registered public accounting firm for 2009.

ITEM 5. Other Information

On July 31,
2009, we amended our credit agreement with our existing bank group. This
amendment is described in more detail in Managements Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.

ITEM 6. Exhibits

See
the Exhibit Index following the signature page to this Form 10-Q,
which Exhibit Index is hereby incorporated by reference herein.

Amended and Restated
Certificate of Incorporation of the Registrant incorporated by reference to
Exhibit 3.1 to the Registrants Registration Statement on Form S-1
(File No. 333-124173) filed with the Securities and Exchange Commission
on April 19, 2005.

3.1.1

Amendment to the
Amended and Restated Certificate of Incorporation of the Registrant
incorporated by reference to the Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2007.

3.2

Amended and Restated
Bylaws of the Registrant incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-1 (File
No. 333-124173) filed with the Securities and Exchange Commission on
April 19, 2005.